Hospital mergers don’t work

There is a growing body of evidence that hospital mergers lead to higher prices for consumers, employers, insurance and the government. It is imperative to educate patients and lawmakers as to how the consolidation of hospitals and medical practices raise costs, decrease access, eliminate jobs and, ultimately, reduce care quality as a result. Lawmakers should focus on this “first pillar” of cost control as they go back to the drawing board.

In 2010, there were 66 hospital mergers in this country. Since the Affordable Care Act went into effect, the rate of hospital consolidation has increased by 70 percent. By creating incentives for physicians and health providers to coordinate under accountable care organizations (ACOs), the ACA hindered the ability of regulators to block hospital mergers while incentivizing hospital consolidation.

In addition, there has been a dramatic increase in hospitals gobbling up independent providers and becoming powerful regional monopolies. According to a 2012 study by the Robert Wood Johnson Foundation, “the magnitude of price increases when hospitals merge in concentrated markets is typically quite large, most exceeding 20 percent.” Forbes’ Avvik Roy, gave an excellent presentation on this particular subject in 2012. “You have to get at the errors in public policies which drive the hospitals to merge.” He concluded that government must do more to fight consolidation among hospitals. He is right.

For years, the concern that mergers drove up prices was largely anecdotal. A recent paper authored by Northwestern’s Leemore Dafny, Columbia’s Kate Ho, and Harvard’s Robin Lee provides some definitive proof that when hospitals consolidate, prices increase substantially. The effect is made worse directly in proportion to proximity of the merging hospitals. “If you are doing it because you think in the long run it will serve your community well, you should think twice,” Dafny said. As of right now, cross-market mergers aren’t scrutinized at the state or federal level. This must change. A statement issued by the American Hospital Association (AHA) in response to Dafny’s paper said mergers provide patients with access to care and they are not a meaningful predictor of price change.

A study published by the National Bureau of Economic Research, conducted by Zack Cooper of Yale University, Stuart Craig of the University of Pennsylvania, Martin Gaynor of Carnegie Mellon and John Van Reenen of the London School of Economics, sheds light on the real cost of reduced competition among hospitals: hospital prices are 15.3 % higher when a hospital had no competition compared in markets with four or more hospitals, amounting to a cost difference of up to $2000 per admission. Hospital prices are 6.4% higher in markets with two hospitals and those with three are 4.8 % more expensive when compared to markets with four hospitals.

The case for hospital consolidation has been supported by the American Hospital Association, the leading industry trade group, which spent

$15 million on lobbying in 2015 (a decrease from $20 million in 2014). Consolidation allows hospital conglomerates to control vast market shares, which has translated into political clout while allowing more leverage in negotiations with private insurers.

“What’s been so interesting for me is to see how aggressive the American Hospital Association has been in coming after me,” says Cooper, who claims the American Hospital Association has funded a couple of critical reports about his paper.

“I have never seen the evidence that consolidation improves quality in the health care space. I have never seen a study that comes out and says that consolidation makes things better,” says Cooper. Neither have I; consolidation does not improve quality. Cooper, like Mr. Roy, suggests rigorous antitrust legislation and increasing competition among hospitals as possible solutions.

Harrison Medical Center is the hospital in which I was born and had expanded into two campuses before being “acquired” by CHI Franciscan Health two years ago. CHI purchased numerous small medical practices, the last independent orthopedic group, and most recently, merged with the largest multispecialty physician group in the county, the Doctors Clinic.

Prior to these mergers, 65% of physicians in Kitsap County, where I live, were independent. That number has plummeted to a dismal 27%. Both hospitals are currently owned and operated by CHI Franciscan and now they want to merge into one structure for an “ultra” monopoly. Every cardiologist, oncologist, pulmonologist, urologist and vascular and orthopedic surgeon in my county are employed or under contract with CHI Franciscan Health.

In the last two years, Kitsap County has lost consumer choice, employer choice, physician choice, insurance choice and access for health care services. Physician groups merging with CHI Franciscan are forbidden from using the local ambulatory surgery center (ASC) for outpatient procedures. The hospital insists on exclusive use of their Hospital Outpatient Department (HOPDs) instead. It is a well-known fact costs at HOPDs are substantially higher when compared to identical procedures done at ASCs. According to FAIR Health, the cost difference (zip code specific) between the two locations is striking:

Colonoscopy:

ASC – $1250 ($500 out of pocket)

HOPD: $4250 ($1000 out of pocket)

Echocardiogram:

ASC $500 ($200 out of pocket)

HOPD: $4250 ($1250 out of pocket)

Arthroscopy of Knee:

ASC – $3600 ($1070 out of pocket)

HOPD: $13,000 ($3900 out of pocket)

Hernia Repair:

ASC – $2500 ($750 out of pocket)

HOPD: $19,000 ($5700 out of pocket)

The above estimates do not include the physician bill or charges for equipment.

In 2009, President Obama spoke in Grand Junction, Colorado to highlight a locality where (to quote Tom Brokaw) “health care works”. Their unique model focused on provider-insurer partnerships to reduce Medicare costs and was lauded by policy makers and media outlets as the epitome of efficiency in health care but, the devil is always in the details. The 50,000 residents of Grand Junction are served by a single hospital, much like Kitsap County, Washington soon. It turns out Grand Junction is one of the most expensive healthcare markets in the country. The lack of local competition helped drive Medicare costs down — Grand Junction had the third-lowest Medicare spending per beneficiary in 2011. However, the monopolistic conditions drove private prices way up — the city has the ninth-highest inpatient prices in the country.

The more government reduces payments to physicians, the more hospital consolidation is encouraged to decrease cost and leverage market forces. This drives prices up for patients with private insurance. Higher prices in less competitive markets amounts to higher premiums passed on to employers and individuals who see bigger bills under their high-deductible health plans. Cities with higher premiums on the Affordable Care Act’s insurance exchanges tend to be those cities with high priced hospitals. Increased concentration in health care victimizes consumers, as hospitals leverage their market position and drive up prices.

Maybe it is time to borrow a page from the Justice Department playbook and scrutinize hospital consolidations more closely, blocking them if necessary for the “greater good.” Recently, two federal judges blocked separate health insurance company merger attempts, Aetna-Humana and Cigna-Anthem. The Justice Department opposed both because “the competition among these insurers that has pushed them to provide lower premiums, higher quality care and better benefits would be eliminated.” Opposing creation of monopolies in healthcare is something both liberals and conservatives alike should hypothetically oppose. We have 3.4 trillion reasons to sit up and pay attention.